Impact Investments have emerged as a new investment option among millionaires and multimillionaires worldwide. Despite its development in 2007, JP Morgan and Global Impact Investing Network estimated the market size of impact investments to be worth approximately $46bn in 2014. However, different investment types make the asset complex and difficult to value, writes Roselyn Lekdee, economist, WealthInsight
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In the UK alone, impact investments valued GBP200 million in 2014 and are set to grow to GBP1 billion by 2016, according to the UK government research in 2014. Most private banks in Europe – including Barclays, Lloyds, RBS, Deutsche Bank and Credit Suisse – have established a separate division to target impact investors and enhance their involvement in helping social change.
This division is often known as ‘sustainable investing division’, ‘responsible investing division’, or ‘social finance division’.
Regardless of the term, the objectives are the same: to generate financial returns and bringing about long-term social change. WealthInsight findings suggest that UHNWIs are more likely to be the initial target audience of impact investments because of the sheer wealth they possess. Private banks in the UK have recognised the importance of impact investments. But more could be done in the private sector to accommodate the growing demand of impact investments in the UK and abroad. Before that happens the issue of ‘impact measurement’ – needs to be addressed carefully.
It is evident from WealthInsight’s study that demand for socio-economic related impact investments is growing rapidly in Asia-Pacific, Africa and Latin America but market expansion among private banks still remains a challenge.
The study also finds that while the demand is there, local investors might not have adopted an attitude whereby they want to give back to the community or invest in social change. As new HNWIs – especially lower-tier and mid-tier millionaires in the emerging markets – are still in the early stage of showing off their financial status by purchasing luxury goods, they might not necessarily have the time or inclination to invest in socially responsible projects. In addition, weak market regulations, economic and political risks in Africa, Latin America and Asia-Pacific also deter private banks and wealth management firms from expanding. By contrast, an increasing number of private banks in Europe are offering clean energy, environmental protection projects and green bonds as part of their impact investment services.
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By GlobalDataAs the eurozone has gained momentum in 2015, increasing number of private banks in Europe are including clean energy, environmental protection and green bonds as part of their impact investment services.
For instance, Barclays and ABN Amro offer opportunities for millionaires and multimillionaires to invest in social enterprises that focus on clean energy. WealthInsight research shows that the green bonds market grew from US$14bn in 2013 to US$40bn in 2014. The market potential for the products became more established after 13 major banks, including Barclays, Goldman Sachs, JP Morgan and HSBC, signed up to the Green Bond Principles in January 2014.
An interview with a director of one of London’s top 15 private bank by AuM working for the Debt Capital Markets division confirms the view that the market potential for green bonds is growing rapidly in Europe, as a vast number of issuers, notably Bank of America Merrill Lynch and JPMorgan Chase and Co., focused on the products in recent years.
Subsequently, Wealthinsight anticipates that clean energy, environmental protection products and green bonds will become more recognized as impact investment services among private banks in Europe over the next five years.
Global Breakdown of Impact Investments
In terms of sector distribution, microfinance and financial services combined accounted for 42% of global impact investment funds in 2014. This was followed by energy at 11%, housing at 8% food and agriculture at 8%, and healthcare at 6%.
Information and communication technology, education, and water and sanitation accounted for less than 4% in the same year. High demand for microfinance and financial services is largely driven by the development of small and medium-sized enterprises (SMEs) and entrepreneurship in emerging markets such as Latin America, Asia-Pacific and Africa. By contrast, the high demand for energy – in particular clean technology – is being driven by demand in developed countries such as the US, Canada, the UK, Germany and France.
Over the next decade, impact investments are expected to grow at a faster rate and expected to emerge as one of the key asset class for HNWI investors, posing opportunities for private banks, social enterprises and institution investors worldwide to capture the market.
According to Status of the Social Impact Investing Market: A Primer, a report published for the UK Cabinet Office in 2013 by Impact Economy, the market size of impact investments is expected to be worth US$400bn – 1trn by 2020.
